Ballay v. Legg Mason Wood Walker, Inc.

• Decision Date: 29 June 1989
• Docket Number: No. 89-1042,89-1042
• Parties: , Fed. Sec. L. Rep. P 94,499 BALLAY, Stephen J., Bandosz, Albert J., Beebee, Susan, Beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L., Bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., John J., Zappitelli, Sophie Chelyk and John A., Deal, Richard A., Deal, Jr., William W., Dudugjian, Carl, as Trustee, Espinoza (Schimmel), Bobbi S., Flamm, George G. Flansburg, Frank M., Gallagher, David G., and Jacqueline, Goldman, Arthur S., Gould, Herbert E., Hoover, Robert A., Jacobs, Richard W., Merriken, Charles J. and Phylliss A., Munger, Edith L., Persons, Jr., Oren M., Resnick, Albert, Richter, Ronald and Lynn, Robinson, Edmund H., Smedley, L., as Trustee, Smith, Allen and Christine, Uhrman, Gary H., Weyforth, Philip A., Williamson, Dennis, Zappitelli, Michael J. and Anna O., Zook, Dunwoody for Zook, Melissa D., and Zook, II, William H.D. and Zook, Susanne C. v. LEGG MASON WOOD WALKER, INC., Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 729

878 F.2d 729

58 USLW 2038, Fed. Sec. L. Rep. P 94,499

BALLAY, Stephen J., Bandosz, Albert J., Beebee, Susan Beebee, Peter C., Behmer, L. Nelson, Behmer, Robert L Bell, Elizabeth W., Broccolini, Agnes M., Burke, Jr., John J., Zappitelli, Sophie Chelyk and John A., Deal, Richard A Deal, Jr., William W., Dudugjian, Carl, as Trustee, Espinoza (Schimmel), Bobbi S., Flamm, George G. Flansburg, Frank M Gallagher, David G., and Jacqueline, Goldman, Arthur S., Gould, Herbert E., Hoover, Robert A., Jacobs, Richard W., Merriken, Charles J. and Phylliss A., Munger, Edith L., Persons, Jr., Oren M., Resnick, Albert, Richter, Ronald and Lynn, Robinson, Edmund H., Smedley, L., as Trustee, Smith, Allen and Christine, Uhrman, Gary H., Weyforth, Philip A., Williamson, Dennis, Zappitelli, Michael J. and Anna O., Zook, Dunwoody for Zook, Melissa D., and Zook, II, William H.D. and Zook, Susanne C. v. LEGG MASON WOOD WALKER, INC., Appellant.

No. 89-1042.

United States Court of Appeals, Third Circuit.

Argued May 23, 1989.

Decided June 29, 1989.

C. Clark Hodgson, Jr., John J. Murphy, III (argued), Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for appellant.

William A. Destefano, Christopher D. Warren (argued), Destefano & Guernsey, Stephen M. Feldman, Philadelphia, Pa., for appellees.

Before BECKER, STAPLETON and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This appeal presents a question of considerable current interest in the marketplace, whether a federal court may refuse to compel final and binding arbitration of a security customer's claims under the Securities Act of 1933 where the customer and the broker have entered into an agreement providing that disputes arising "under the federal securities laws" need not be arbitrated but could be litigated in the courts. Plaintiffs are investors who held trading accounts with defendant Legg Mason Wood Walker, Inc. (Legg Mason), a securities broker. After suffering losses in their accounts, plaintiffs brought suit, seeking damages, in the United States District Court for the Eastern District of Pennsylvania against Legg Mason, alleging, among other things, that Legg Mason violated sections 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. Secs. 77l(2) and 77o. On the basis of an arbitration agreement executed by the parties in connection with plaintiffs' stock purchases, Legg Mason moved the district court to stay proceedings in that court and to compel arbitration of plaintiffs' claims. The district court denied the motion, and the defendant appealed. We affirm.

I.

Plaintiffs are forty-one investing customers who allegedly suffered losses as a result of misrepresentations by Legg Mason concerning the book value of certain securities purchased by plaintiffs. In their complaint, plaintiffs charged Legg Mason with violations of sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j(b) and 78t (Exchange Act), of sections 12(2) and 15 of the Securities Act of 1933, and of the common law.

When they opened their trading accounts with Legg Mason, sixteen of the forty-one plaintiffs signed customer agreements that contained an arbitration provision. The provision stated that disputes arising out of the purchase or sale of securities would be arbitrated, but added the qualification that disputes arising "under the federal securities laws" need not be arbitrated but could be litigated in the courts. ¹ On the basis of this arbitration provision, Legg Mason moved the district court to stay proceedings and to compel arbitration of the sixteen plaintiffs' claims.

In its memorandum opinion and order, the district court partially granted and partially denied defendant's motion. On the authority of Dean Witter Reynolds v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985), the court held that the plaintiffs' common law claims must be arbitrated. Moreover, the district court held that under Shearson/American Express, Inc. v. Mahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), plaintiffs' claims under the Exchange Act of 1934 also had to be arbitrated. The district court, however, observed that despite the decisions allowing arbitration of state law claims and Exchange Act claims, the Supreme Court had not yet explicitly reversed its earlier decision in Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), which held agreements to arbitrate claims under the Securities Act of 1933 unenforceable. The court therefore refused to compel arbitration of plaintiffs' claims arising under the Securities Act of 1933. Legg Mason appealed that portion of the district court's order.

II.

As a preliminary matter, we address the appealability of the district court's order. Plaintiffs challenge our jurisdiction to consider an immediate appeal of the court's refusal to compel arbitration. Legg Mason moved to compel arbitration pursuant to section 4 of the Federal Arbitration Act (the Act). 9 U.S.C.A. Secs. 1-15 (West Supp.1989). The court's order denying the motion with respect to the Securities Act claims undisputedly was issued in context of an ongoing proceeding and was therefore interlocutory. Plaintiffs argue that the appeal provisions of the recently amended Arbitration Act, 9 U.S.C.A. Sec. 15 (West Supp.1989), do not provide for immediate appeal of an interlocutory order denying a motion to compel arbitration brought pursuant to section 4. They argue that section 4 contemplates the initiation of a separate action to compel arbitration, and that section 15 allows immediate appeal only of final orders denying section 4 motions that emanate from separate proceedings.

Section 15, enacted in November 1988 as part of the Judicial Improvements and Access to Justice Act, P.L. 100-702, outlines the principles governing appealability of orders and judgments relating to arbitration. The section provides that an appeal may be taken from an order refusing a stay of judicial action requested under section 3 or from an order denying a petition to compel arbitration under section 4 or from a final decision with respect to arbitration. ² That section also describes the circumstances in which appeals may not be taken. It provides that appeals may not be taken from interlocutory orders granting a stay of action under section 3 or directing arbitration to proceed under section 4. ³

The amendments reflected in section 15 introduce a welcome symmetry into an area of law previously distorted by "Byzantine peculiarities." New England Power Co. v. Asiatic Petroleum Corp., 456 F.2d 183, 189 (1st Cir.1972); see also Zosky v. Boyer, 856 F.2d 554, 560 (3d Cir.1988) (pre-section 15 case examining complicated history of appealability of orders relating to arbitration), cert. denied, --- U.S. ----, 109 S.Ct. 868, 102 L.Ed.2d 992 (1989). The amendments do not alter the principles of appealability with respect to final orders. With respect to an interlocutory order issued in an ongoing proceeding, however, section 15 makes clear that any order favoring litigation over arbitration is immediately appealable and any order favoring arbitration over litigation is not.

Because this case does not involve a separate section 4 proceeding, the principles respecting final orders are not at issue here. The only relevant principles are those respecting interlocutory orders. Because the appeal provisions of section 15(a) are written in the disjunctive--listing a denial of a section 4 order separately from a final order--there should be no doubt that a section 4 order need not always emanate from a separate proceeding. See also Zosky, 856 F.2d at 556 (noting that section 4 motions to compel arbitrations are often filed in ongoing proceedings). It is likewise clear from the same provisions that an interlocutory order denying a section 4 motion to compel arbitration is immediately appealable.

Under this commonsense reading of the newly amended Federal Arbitration Act, we reject plaintiffs' argument that we lack jurisdiction to consider this appeal. We therefore turn to the merits of the district court's decision. ⁴

III.

At the time the district court ruled on the motion to compel arbitration, the enforceability of predispute arbitration agreements covering claims arising under the Securities Act of 1933 was in dispute. A brief history will explain. In the 1953 case of Wilko v. Swan, 346 U.S. at 438, 74 S.Ct. at 188, the Supreme Court invalidated predispute agreements to arbitrate Securities Act claims. Lower courts then extended that rule of nonarbitrability to claims arising under the Exchange Act of 1934 as well. Over the years, however, judicial distrust of arbitration as a means of resolving securities disputes began to dissipate, and the Supreme Court began to favor arbitration. See, e.g., Shearson/American Express, Inc. v. McMahon, 482 U.S. at 231-32, 107 S.Ct. at 2339-40 (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985); Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985); Southland Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984); Moses H. Cone Memorial Hospital v. Mercury Construction Corp, 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); Sherk v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41 L.Ed.2d 270 (1974)). Most importantly, in Shearson/American Express, Inc. v. McMahon, 482 U.S. at 238, 107 S.Ct. at 2348, the Court reversed the general rule with respect to securities arbitration and held that agreements to arbitrate claims arising under the Exchange Act were enforceable. Because McMahon did not involve claims arising under the Securities Act, however, the Court did not expressly overrule its earlier decision in Wilko. But in rejecting as outmoded Wilko 's bias against arbitration McMahon cast serious doubt on the continuing vitality of the Wilko rule that arbitration agreements covering Securities Act cl...